Public REIT pursues acquisitions of Michigan farmland

Virginia-based Gladstone Land Corp. recently purchased a 119-acre blueberry farm in Covert, Mich. in Van Buren County and is pursuing other deals across the state for agricultural lands with existing row crops. The publicly traded real estate investment trust is targeting older farmers looking for liquidity with no succeeding generation in place. After the purchase, the company leases the land to other farm operators.

Virginia firm buys Covert blueberry farm, eyes other transactions

One publicly traded real estate company’s recipe for success includes at least a dash of Southwest Michigan berry farms.

With the initial purchase of a 119-acre blueberry farm in Covert, Mich., Gladstone Land Corp. (NASDAQ: LAND) plans to lay the groundwork to buy up other row crop farms in the state.

The Virginia-based firm is actively reviewing the purchase of at least two more Michigan farms, CEO David Gladstone told MiBiz.

After an initial public offering that raised $51.5 million in January, Gladstone has been buying up lands as some farmers look to exit their businesses. After the property transaction, Gladstone then leases the land to operators to run the farms.

A corporate farmer with operations in Michigan, Florida and Georgia will run the new acquisition in Southwest Michigan, Gladstone said. The Van Buren County site is one of 13 properties and some 1,750 acres Gladstone owns across the country.

“We’re tuning up and beginning to buy as much farmland as we can right now,” Gladstone said. “There are lot of farmers out there just leasing their farms (who) have children with no orientation for the business. They’re getting older and looking for some liquidity.”

This is when the firm can step in, Gladstone said. By buying farms from long-time landowners, Gladstone can help an older generation exit the business while offering either cash or stock, he said. Importantly for the rural character of the surrounding areas, the lands also remains in agricultural use.

Gladstone is executing this purchase strategy across the country, focusing solely on berries and other ground crops ranging from lettuce to melons. Other states the company plans to target include Georgia and Oregon.

While the firm is wary of investing in Michigan orchard land because of the harvest volatility seen in recent years, it could consider such properties in future deals, Gladstone said. The company is sticking primarily with berry farming because of CEO Gladstone’s long history in the business, particularly with strawberries.

At one point, Gladstone owned Coastal Berry, one of the largest strawberry operations in California. He sold the company in 2004 to Dole Food Co., a global producer of fresh fruit and vegetables. As part of the deal, Gladstone kept his land and leased it back to back to the multinational food producer.

From there, Gladstone continued to acquire new investments, buying and leasing farmland across the county.

While there are numerous private companies buying up agricultural operations, Gladstone claims his company, which is qualified and taxed as a real estate investment trust (REIT), is the only public company buying and leasing back farmland.

The strategy for the company banks on the price for fruits and vegetables continuing to rise, which will allow the company to increase the cost of land leases. As that trend occurs, the company plans to expand the product diversity of its land portfolio, Gladstone said.

While Gladstone is perhaps one of the few public companies eyeing farmland purchases, other private companies are also taking note, according to one local expert.

“There has been a recent uptick in interest (from) companies looking to purchase farmland in Southwest Michigan,” said Dr. Adam Kantrovich, a regional farm management agent for Michigan State University Extension in Ottawa County. “Land management companies are always looking to diversify their portfolios. My guess is (Gladstone) believes land in Michigan has not yet priced itself out, and (the company) expects some upward movement over the next several years.”

In fact, Michigan farmland values grew about 8 percent last year compared to 2012, according to the “Michigan Land Values and Leasing Rates Report” released by Michigan State University last November. Leasing activity also continued to grow as a tool to control farmland. Last year, 57 percent of the crop acreage was controlled through leasing arrangements, compared to 47 percent a decade ago, according to the report.

Of the leased land, 81 percent was leased on a cash-rent basis, the cost of which increased significantly for several property types including tiled, non-tiled and irrigated cropland.

Mirroring the path of commercial real estate loans, interest rates for agricultural lands have also hit record lows lately, MSU reported. During the 1990s, interest rates for loans on farmland purchases typically ranged from 8 percent to 10 percent. Today, those same interest rates are hovering around 5 percent.

The lower financing cost has acted as a stimulus to spur investment activity in farmland across the state, Michigan Farm News reported.

Kantrovich said very few farmers he’s talked to are interested in selling their property. Instead, due to relatively strong production, most are looking to expand their operations, he said.

However, Gladstone and other private land management companies continue to pursue land acquisitions, Kantrovich said.

If the MSU report is any indication, that activity is likely driven by record farm incomes and strong commodity prices that have helped lift profits and land values. While the report found the current return on investment for farmland has fallen from around 6 percent in the early 1990s to around 3 percent today, companies like Gladstone are banking on crop diversification and rising crop prices in the future, Kantrovich said.

Another motivator for companies to invest in farmland: The U.S. Department of Agriculture projects domestic farmland income will reach nearly $90 billion in 2020.

Still, Kantrovich doesn’t see Gladstone’s foray into Michigan creating very much volatility in the local farmland market because the acreage the company has acquired is still relatively small — at least for now.

While the purchases remain piecemeal at this point, the potential for more competition could eventually start to drive up rental prices, values and the number of deals, Kantrovich said.

One important consideration for farmland preservation is that, regardless of whether the buyer is a REIT like Gladstone, an out-of-state private company or a locally owned producer expanding his reach, the land isn’t in danger of being put to another non-agricultural use, Kantrovich said.

“This property is going to remain farmland because all of those looking at investing in this type of asset are experienced in some part of the agriculture business,” he said. “Considering specialty crops, I have received a handful of phone calls from other land management companies over the past few months that have been showing interest in Southwest Michigan properties.”

Regardless of who is coming to the table with purchase offers, Kantrovich said the groups of farmers and families he is working with on succession planning for the most part want to see operations stay locally owned.

Based on his current work with farm owners across West Michigan and on the success of agriculture over the last decade, Kantrovich maintains the next generation is ready and waiting to take over.

“There are a lot of negative perceptions with outside land management,” he said. “But having said that, if an owner doesn’t have the next generation coming, his retirement is based on his ability to transition out of the business some other way.”